Retirement tax questions

When you inherit an IRA from someone other than your spouse, you are required to either begin taking Required Minimum Distributions (RMDs) based on your age, withdraw the entire amount or you are subject to the 5 or 10 year rules.

The ten year rule states that if you did not begin taking RMDs based on your age, you have to withdraw the entire amount of the account by December 31 of the ten year anniversary of the owner's death. This was changed to five years in 2019, but you are grandfathered in to the 10 year rule.

Since the ten year anniversary has past, you need to contact the trustee or broker of the account and have it fully distributed to you as soon as possible.

In addition, you may be subject to a 50% excise tax due to Insufficient Distributions. You can use Form 5329 to request a waiver of that amount.

If you should have withdrawn the account in 2020, you will need to amend the tax return for 2020. You would add Form 5329 and then ask for the full amount of the penalty to be waived.

Here are the specific IRS instructions for Form 5329:

"Waiver of tax for reasonable cause. The IRS can waive part or all of this tax if you can show that any shortfall in the amount of distributions was due to reasonable error and you are taking reasonable steps to remedy the shortfall. If you believe you qualify for this relief, attach a statement of explanation and file Form 5329 as follows.

1. Complete lines 52 and 53 as instructed.
2. Enter “RC” and the amount of the shortfall you want waived in parentheses on the dotted line next to line 54. Subtract this amount from the total shortfall you figured without regard to the waiver, and enter the result on line 54.
3. Complete line 55 as instructed. You must pay any tax due that is reported on line 55.

The IRS will review the information you provide and decide whether to grant your request for a waiver. If your request is not granted, the IRS will notify you regarding any additional tax you may owe on the shortfall."